In this paper we propose that the rise in underemployment has changed the wage setting process in the labour market and is now used by employers as a means of disciplining wages growth. We use the Australian labour market as the empirical example. Our further work will focus on other economies. The paper is laid out as follows. Section 2 traces the rise in underemployment in Australia to the dynamics that accompanied the 1991 recession. Firms rapidly replaced full-time jobs with fractional opportunities. Section 3 considers wage and productivity movements in Australia and finds that over the recent growth cycle, real wages have trailed behind labour productivity and hence there has been a massive redistribution of national income to profit. Further, the relation between the employment rate and real wages growth has changed dramatically over the last growth period. Compared to earlier periods, rising employment rates have very little impact on real wages growth. Section 4 develops a theoretical model grounded in labour market segmentation theory to explain these trends. Section 5 provides formal econometric evidence to support the proposition that underemployment is a significant negative influence on inflation. Concluding remarks follow.

Relation

Labour Underutilisation, Skills Shortages and Social Inclusion: Incorporating the 10th Path to Full Employment Conference and 15th National Conference on Unemployment. Labour Underutilisation, Skills Shortages and Social Inclusion: Incorporating the 10th Path to Full Employment Conference and 15th National Conference on Unemployment: Proceedings (Callaghan, N.S.W. 4-5 December, 2008) p. 116-131